October 6, 2020/InvestmentOne Report

Please click to view the September 2020 Macro & Markets Update

·        In the month of September, oil prices came under pressure as COVID-19 cases jumped in Europe, threatening oil demand further. In the same vein, continuous drag in negotiation for another relief package in the US continued to cloud prospects of a swift recovery in global demand. 

·        The Central Bank of Nigeria (CBN) published Nigeria’s Purchasing Managers Index (PMI) report for Sept-2020. According to the report, economic activities remained contractionary during the survey period.

·        Overall, we expect to see the economy shrinking by 3.6% in 2020. We highlight that our latest projection is better than International Monetary Fund‘s (IMF) estimate of -5.4% but worse than the World Bank’s projection of -3.2% in 2020.

·        The National Bureau of Statistics (NBS) the inflation report for the month of August 2020 which revealed that headline inflation continued its upward trend for the 12th consecutive month and the highest since April 2018.  

·        The food sub index remained the main driver of the uptick in   headline inflation, rising by 16.00% y/y in August-2020 compared to 15.48% y/y increase in July-2020. We opine that the northward trend will continue due to the flood which may badly hit harvest.

·        In our view, the outlook for the headline inflation rate remains biased to the upside for the rest of the year amid recent upward adjustment in electricity tariffs, fuel prices and FX market instability.  

·        In the outgone month, the Nigerian fiscal space saw pricing  adjustments for electricity and power costs face heightened backlash from the general public, further accentuated by main unions’ strike threats. In other news, FAAC numbers printed slightly higher m/m, at N682.1billion, even as oil price lost 9.56%.

·        In the outgone month, in a move that surprised analysts, the Monetary Policy Committee (MPC) cut the benchmark interest rate by 100bps to 11.50%, the lowest rate since 2016.  

·        In juxtaposition with the upward trajectory in inflation (currently 13.22%), the probability of earning negative real return has increased.

·        Going forward, we see yields in the fixed income space remaining at current levels as we see continued interests from the local Portfolio Managers given limited investment opportunities and elevated risk in the variable income assets.  

·        The decline in interest rates may serve to deter FPI interest especially given the concerns over the stability of the naira in the near future.

·        In the outgone month, Brent crude price trended lower as it lost c.10% to close the month at US$45.22/barrel. This was on the back of a roller coaster of negative news ranging from rising COVID-19 cases in Europe and the U.S. to potential of new oil supplies coming into the market through Libya and Iraq.

·        In the local scene, FX reserves closed the month higher, albeit slightly, as it inched up by 0.14% to US$35.72billion.

·        Going forward, on the back of the Apex bank’s renewed participation in the FX market; we expect stability in the Naira in the near term.  

·        The Nigerian equities market remained positive, as the NSE-ASI advanced by 2.57% m/m to close at 26,831.76pts. Consequentially, the YTD loss improved to 0.04%. 

·        With investors stumped by high liquidity, limited investment outlets and uber-low interest rates, the investment case for   equities seems increasingly compelling notwithstanding the rising country risk premium. 

·        In the same vein, annualised returns (dividend yields) on some quality names look more attractive for investors who are willing to invest with a medium to long-term horizon.